Market Brief: Outlook Improves As Global Private Sector Activity Rebounds 

A hint of cautious optimism is creeping into currency markets this morning after a raft of activity gauges suggested that the global private sector is proving surprisingly resilient in the face of the US trade onslaught. The dollar is trading sideways, yields are up slightly, and North American equity futures are pointing to continued selling pressure, but this appears largely contained in the technology sector, with broader measures looking relatively stable.

The euro and British pound are both holding steady against the dollar after preliminary August purchasing manager indices popped higher, outperforming expectations for a modest improvement. In the euro area, the composite index climbed to an 18-month high at 51.1—above the 50 threshold that separates expansion from contraction—as manufacturing activity improved, fully offsetting a slight decline in services growth. Across the Channel, the UK private sector enjoyed a substantial uplift, with the composite index jumping to 53 in August, up from 51.5 in the month before as both the manufacturing and services sectors reported a brightening in the outlook. Similar results are expected from the US and Canada when they are updated later this morning.

Forgive us for the pessimistic outlook*, but we suspect that this could prove short-lived. New order indices are exhibiting softness across most major economies as tariff front-running effects run their course and inventories are wound down. Another, more prolonged bout of weakness could appear later this year as global trade volumes revert lower.

In July, Federal Reserve officials saw upside risks to their price stability mandate outweighing the threat to labour markets. According to a meeting record published yesterday afternoon, “A majority of participants judged the upside risk to inflation as the greater of these two risks”, while “several” considered them “roughly balanced”, and a “couple” (likely Governors Chris Waller and Michelle Bowman) saw the possibility of an employment downturn as the “more salient risk”. “Many” officials noted that it could take time for tariffs to impact the economy, but “several” officials warned that the county’s recent experience with inflation “could lead to expectations becoming unanchored in the event of drawn-out effects,”—a fear borne out in this year's consumer surveys. Some noted that they expected growth to weaken in the second half of the year as slower income gains hit consumer spending. This came before the July non-farm payrolls report, which saw May and June job growth estimates revised downward by 258,000—likely adding to the ranks of the doves on the committee.

The Trump administration earlier opened a new front in its attack on the Fed, with the president demanding that Governor Lisa Cook resign over allegations of engaging in mortgage fraud before her appointment. According to a criminal referral submitted by Federal Housing Finance Agency Director Bill Pulte—who has repeatedly called for Jerome Powell’s ouster in recent months—Cook opened mortgages on two separate homes in 2021, each of which she claimed as her primary residence. In a social media post, Trump said “Cook must resign, now!!!,” and media reports suggested that he was considering firing her for cause. “I have no intention of being bullied to step down from my position,” Cook said upon learning of the accusation. “I do intend to take any questions about my financial history seriously as a member of the Federal Reserve and so I am gathering the accurate information to answer any legitimate questions and provide the facts”.

The dollar declined, the yield curve steepened, and gold gained as investors braced for further erosion of the Fed’s commitment to price stability, but this price action had largely reversed itself by day end. Cook’s departure might mean that Trump appointees fill four of the seven spots on the Board of Governors, but there are also four regional Fed presidents with rotating votes, meaning that any long-term dovish bias among officials jockeying for the administration’s favour could be substantially offset by a broader group of centrists.

Fears surrounding the Fed’s independence are likely driving long-term yields higher, but they don’t seem to be dampening global demand for US assets. According to the latest data, foreign private investors ploughed a net $802 billion into American securities markets in the first half of the year, with 12-month rolling flows remaining firmly in record territory. This lends further credence to the thesis advanced by the Bank for International Settlements and others— which suggests that a significant share of the greenback’s decline in the early part of the year was driven by hedging activity, not outright sales of US investments—and supports our belief that any decline in ‘US exceptionalism’ could take years, if not decades, to play out**.

Interestingly***, incoming data is also failing to confirm anything resembling a sudden surge in appetite for assets in the euro area. Net inward portfolio and direct investment flows rose only modestly through the first six months of the year, while outflows—consistent with the bloc’s current account surplus—remained larger in scale as euro-area residents added to their foreign debt and equity holdings. To us, this suggests that a change in perceived risk distributions—namely, greater awareness of downside risks in the US dollar—is influencing currency markets more than mechanical shifts in cross-border capital flows.

*As George Carlin put it, "Some people see the glass half full. Others see it half empty. I see a glass that's twice as big as it needs to be".

**The parallels with the UK’s post-Brexit experience are clear. ***Your mileage may vary.

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